Japan Display Inc

TSE:6740

Earnings Call Transcript 2023-Q1

[Scott Anderberg Callon, executive]

Hi, everybody. I'm Scott Callon. Thank you so much for joining today. I'm working off the presentation that's in front of us. It's also available on our home page, FY '23, so March 2023 Q1 corporate presentation. I'll go through the numbers and then we'll take a look at kind of what's -- what we were doing on the technology front.

So next page, please, PersonalTech for a better world, that's what we stand for. And that's genuine. So starting with the key points, it was actually a strong quarter, but a really complicated one from an operational execution perspective. The sales were down 13% year-on-year. This is in part as we wind down our smartphone LCD business, but it was an absolutely extremely difficult quarter to manage through from a supply chain perspective.

As you know, the Shanghai lockdown occurred during the quarter. It pushed down our auto sales quite a bit. We have a major back-end fab in Suzhou, which is right next to Shanghai, and it was a very complicated quarter from a supply chain management perspective.

Our operating loss widened by JPY 1 billion year-on-year on lower sales, but we actually crossed our forecast. There was substantial improvements. Cost reductions, we know, and the great thing about the auto business is it gives you very long-term visibility. So we now -- we've got a very strong rebound in orders coming from Q2 onward in the auto space, and we benefit from a weaker yen.

So all things -- all those are very incredibly important, probably the most important being cost reductions. We really have had a significant focus, and the major contributor of the upside is cost coming in lower than forecast. We need to decrease our sensitivity to the market environment. One of the ways you do that is take up fixed costs. So that's a very, very solid and ongoing improvement we expect to see taking us forward.

Our net loss improved substantially and again massively outperformed the forecast due to the above positives and also a recording of an FX gain, and we're keeping our full year forecast unchanged. That's a way of saying massive outperformance in Q1, and that could imply we're going to raise the full year forecast, but it's a very difficult world out there.

We're seeing inflation running at the highest it's been in 50 years. There's a war going on in Europe. As you know, consumer purse strings are being tightened. We think it's appropriate to be prudent about what the next 9 months looks like.

Next page, please. So look, that very number is kind of pretty quickly. You can see on this page, we've got a year-on-year dropping off in a very substantial size in mobile U.S. and European and also, some extent, in China. This is again in the U.S., and European is winding down kind of our high-end LCD business. That's kind of our plan and exactly as we expect it to be. There's a very substantial inventory adjustment that's gone on, and it's still going on in China, which is a major smartphone market.

As you can see, offsetting those, to some extent, is a big increase in automobile sales, despite kind of all the things that have been during the quarter and if that sounds the Shanghai lockdown, that will be the most important one. So a small year-on-year downward move in terms of profitability that is driven primarily by the Shanghai lockdown effects.

Turn to the next page, please. And taking a look at versus the forecast, you can actually see, despite the very big uplift that I just described in the previous page that we thought we're going to do a lot more in August. So here, the visibility of the Shanghai lockdown is far more apparent. And we actually did slightly -- did more than we expected in U.S. And European mobile activity kind of came flat on in mobile and some slight improvement in the non-mobile area, and we are a beneficiary of the yen -- of the strong yen.

We have a lot of costs in Japan, JPY 135 to the dollar. We arguably are the single most cost competitive G6, which is a major fab in Chiba outside Tokyo in the world. So that's contributory to us having a strong kind of tailwind in terms of our earnings going forward.

Next page. You can see the breakdown, both on a year-on-year on the left-hand side and on quarter-on-quarter, big drop off in volumes that is -- some of that is going to be the effect were pushed down in the LCD, which is strategic. And some of that is more, but actually is this kind of punch in the face, which is the Shanghai lockdown.

Look, the world understands Shanghai to be a major global financial center, which is totally correct. It's also a massive biotech manufacturing hub. So when things go wrong in Shanghai, it really does affect the global supply chain.

Next page, please. In terms of what's going on and the business environment, I'll turn it into kind of much more detail is what we're doing on technology front. But broadly, robust automotive demand and weak mobile and non-mobile demand.

And non-mobile, significant amount, that is metaverse kind of be our headsets, much more of a discretionary spending. It's interesting on the auto is it remains to be very, very strong. And so the key is to drive down our cost and to drive sales and reduce the cost at the same time, being smart about kind of how we operate with respect to changes in the operating environment.

And we've got some description activity, which we will get into a lot of detail, because this is mostly managing our way through our current business environment, which is super important. But the other element of it is what are we doing on technology front to deliver proprietary global #1 technology, and I'm going to talk about that in more detail in the next section.

So we'll just jump to that. Lots of things going on, a lot of actions we're taking in order to respond to them. And we've got a series of world first in terms of a technology rollout. And it would tell you, if you want to be first in the world, you want to be fastest in the world, JDI has gotten very, very fast.

So you should fully expect from us and monitor for us for our ability to manage well and quickly during these kinds of downturns, and we're currently experiencing a downturn in the consumer side.

Next page, please. Yen depreciation is a clear positive, but we're not adjusting our full year forecast, despite having kind of blown the doors off Q1, and that speaks to -- we are concerned about what's going on right now. Q2, Q3 and Q4 could be weaker than expected. And at this point, I would expect that at the half -- at the end of the first half, which is from our November announcement, we'll have kind of more guidance for you as to how we think the year ends up. And we do all the things that we need to do in order to grow as a technology company, and I'll turn to that next.

Next page, please. So turning to operating environment and kind of more broadly kind of what we're doing in the environment. So I already touched on the Shanghai lockdown, which was basically a night fight in a typhoon. It is kind of over, and the negative effects have been widely resolved.

The most important element of what we're doing is the second point. We have developed and we announced a series of proprietary global #1 to new technologies that -- and we'll talk to them in more detail later, but truly transformative for the industry and certainly for us.

We unveiled our METAGROWTH 2026 growth strategy on May 13 to talk about how we're going to drive our transformational growth. We're accelerating ESG initiatives. We're doing a lot of things on that front, and we've also taken steps to close the Higashiura fab, which will take out about JPY 9 billion cost starting next year. So we understand both where growth comes from and our cost structure kind of can be improved over the next kind of 12 to 18 months.

Next page, please. So in METAGROWTH 2026, we articulated 6 proprietary growth drivers, meaning these are JDI-only technologies. Look, if you're going to contribute to the world, and that's really, really important to us, you need to offer something different. It's not super useful to be firm #5 or firm #6 offering a technology that 4 or 5 other firms have brought to market.

It's also a terrible way to make money as a company, and so it's absolutely critical for us. And we have retaken technology leadership, and that's at the heart of our business strategy and our social contribution strategy. We are delivering technologies that no other company has been able to create, and they're going to be absolutely transformative.

I'll talk about in some detail eLEAP, which is a next-generation OLED technology. We began sample shipments this month. We're well along the way with commercial products and discussions with customers. We're also working on technology license with, at this point, what have been our competitors in the market in the display technology market. And increasingly, likely, many of them are going to be our technology partners.

HMO, high mobility oxide, we have an open strategy for that one in terms of our license activity, and we're in discussions with multiple potential technology partners.

In the metaverse space, I'll also talk about this later, but the key elements are we're pushing ahead with super high -- ultra-high -- super ultra high definition VR displays, up to 2,500 ppi, and we're beginning prototype production with our HMO technology for VR displays.

Next page, please. In AutoTech, in addition to eLEAP, our next-gen OLED technology, which is super relevant to the space, you should know that OLED has almost no market share in the auto space. And the biggest issue is that it doesn't have the reliability and the durability to survive well in an auto environment for 5 years or 10 years. And our eLEAP technology offers 3x the lifespan. So it is the breakthrough technology that's necessary to penetrate the auto space.

I would also point out that this is -- and what's special about eLEAP is it's the world's first maskless OLED technology. We're not using fine metal mask, and the result of that is you can get much higher precision and much higher durability. You also get the ability to free shape. So the ability to do -- most phones and things are square. That's also -- a square phone is perfectly fine. It's also linked to the fact that metal mask are squares themselves. When you take away the mask, you have the ability to design all sorts of shapes that is particularly relevant to the auto market.

We want to be able to put the displays and also to configure the relations within a highly designed highly aesthetic car. So initially, eLEAP and HMO being super relevant to auto tech. We also have customer interest in our other technology -- propriety technologies, including privacy view, integrated cockpits and advanced head-up displays where we're #1 in the world.

I'll talk about Rælclear, started as a technology that was small because it's really, really hard. We're the only company in the world that can make two-way fully transparent displays. That's why Rælclear is what it is. If you're starting to see, you go right, it's clear. If you're starting to seeing go -- and go left, it's also clear. It is the only Rælclear from 2 directions technology -- display technology on the planet.

And in terms of new tech, products and businesses, we're rolling out a whole bunch of things to -- our external hover sensors and flexible LTPS TFT pressure distribution sensor, that's a bunch of words, we're saying, hey, we're going to do super highly precision and flexible sensors with some really interesting customer applications available to them.

Next page, please. So I mentioned, and this is -- these are some photos of what we started, customer samples this month for eLEAP. It's an absolutely massive breakthrough in terms of OLED technology. Again, you get twice the brightness or half the energy consumption. You get 3x lifetime relative to existing OLED technologies.

We made our METAGROWTH announcement on May 13. There is a fairly substantial presentation available and a video if you'd like to look at it. So we have more technology details in it, but this is an absolutely transformational OLED technology, and we're really excited about it. And we're moving very, very quickly. We expect to be in full mass production in 2024. And as I say, we're doing customer shipments -- sample shipments from next month.

Next page, please. In HMO, so that's high mobility oxide, the huge breakthrough here, again, we're the first in the world and the only people in the world who had been able to achieve this. We're using a target material developed by Idemitsu Kosan, which is a fantastic material that no other display companies have been able to use because they don't have our process capabilities.

But what this allows for is oxide is a very robust backplane technology. So the backplane is the part of the display that displays the frontplane and also the OLED, which takes pixels and turns them into light. It's the backplane, which is kind of the compute matrix, which sends the signals to the pixels, and that technology is fundamental, just like the frontplane.

And oxide is a very robust, mature and inexpensive backplane technology, which has been plagued by terrible performance from the oxide. It's got very low power consumption. It has terrible performance. You can't do -- fast displays are grainy. And so what's special and manageable, and it's truly manageable, about our HMO breakthrough is we bring high mobility to oxides. It's never been done before.

So you get this very robust low-cost technology, which is arguably the #1 backplane technology on the planet. We will be [ nascent ] to market ourselves. And again, we expect to be a mass production in 2024.

What's so powerful about both eLEAP and HMO is their ability to dominate kind of on the competing technology set in kind of every display category from small to big. And so clearly, it's the case. Our biggest fab is G6, which is not optimized to do things like televisions. HMO is -- can go everywhere.

So for us to license out this technology,is a very powerful way for us to develop both the new revenue stream, but also to take our technology in all sorts of places with technology partners in doing so. So we're very excited about it.

Next page, please. In the metaverse space, we call it the resolution revolution, which is true. The thing that's important to know about the metaverse is you see these PPIs like on the screen right here. And by the way, we're the only company in the world shipping a 1,200 ppi high resolution in metaverse, and this is VR headset. No other company can create it, nobody. It's really hard technology.

And when you look at it, like, okay, high-end smartphones or 400 to 500 ppi, why do you need 1,200 in headset? And the answer is pretty straightforward. It's all about the lens. When you got this thing right in front of you, in order to give it kind of the full kind of immersion that you need, you need to use a lens, which magnifies. And so typically, the lenses of 7 to 10x, that's the way of saying, we're shipping a 1,200 ppi display. It's got a 10x lens on it. You're actually only experiencing 120 ppi.

And so there is this huge demand for driving higher resolution in this space because that heart of the metaverse or come out the VR headset world as a subset in metaverse is all about immersion. And if you're in this kind of funky pong 30-year-old Nintendo sort of world, you're not getting immersion. You're in this kind of funky kind of poor graphic quality world.

So it's really, really important to generate high resolution. That's a use case for these high-resolution displays. And again, we're #1 in the world in this. So we had announced we're going to 2,000 ppi by 2025. We're now in development of 2,500 ppi. The customer demand for this is absolutely voracious.

And second, on the bottom of the page, we are taking our HMO technology into the VR space that will deliver high performance and lower energy consumption for the metaverse.

So next page, please. For Rælclear, again, this is a unique technology. We're using a completely different technology set that's based in a very sophisticated set of material science capabilities. It's so hard that we first started with kind of something that was basically a handset because it's always a very hard technology. And yes, that's what we do. At the end of the day, if you're going to contribute to growing, you do things that are hard.

And so we started with this kind of several-inch model. We progressed up the technology of the 12-inch model, which we're shipping now. We've now fully developed 20.8 inch model, which we'll begin shipping next year, and we're taking this technology to brand new areas, and it's just truly disruptive.

For all intents and purposes, there are folks out there who would say they're shipping transparent displays. It's only one-way transparency. It's actually at low resolutions and not fully transparent. So our transparency is like window glass. So it's truly transparent, as you can see on the page.

We're taking kind of -- this is kind of shattering what a display is. Display at this point in time today is something that you put in front of you with blocks. And presumably, this is -- what you're currently watching on display right now and blocks everything behind it. And instead, we can turn a display into a window. It's really powerful and interesting.

And particularly, with the 21-inch model, it's -- we've began showing this to customer. It's just kind of mind blowing. So we have very high expectations for this. We've actually kind of put into our model that we're going to get kind of 0.001% of the global display space, but it's increasingly obvious that this is going to be a major growth driver for JDI.

Next page, please. In terms of financial targets, there, as I put in front of you, one of the things that's worth pointing out is that these numbers show no licensing fees in them. We decided that we would show numbers that are conservative relative to what we're going to manufacture with that technology set and what kind of income stream does that generate.

So there is actually a substantial upside to these numbers should we succeed with our licensing. And it looks -- given the discussions we're having with technology partners, so that looks like it's going to be successful. And we think that this was important to do when we announced this in May was to show year-by-year numbers. It gives an opportunity for even monitoring activity in the space.

Next page, please. Look, we're committed to doing the right thing for the planet. And increasingly, it's not only the things -- the choices that we make in terms of minimizing environmental impact, but the green technologies that are really powerful for customers. So I mentioned, for example, eLEAP allows for a 50% reduction in energy consumption. HMO has a 40% reduction in power consumption. eLEAP has a nonmask process. It's the only one in the world for OLED. It means you don't have to use all these toxic chemicals to clean your mask on a daily basis.

These are very powerful, environmentally positive technologies. We're pleased to say that FTSE has recognized our commitment to these ESG concerns, and we entered the FTSE Blossom Japan Sector Index, which is an ESG index.

Next page, please. Across the board, we're trying to do more and better because we should. And so we have been producing even solar power at Tottori fab in Japan for a long time now. From last month, we began solar power generation in China at our manufacturing subsidiary there also.

Next page, and this is the last one. It's something we've not touched on before, but it's actually really very important. I won't say the name of the massive kind of U.S. cloud vendor who told us, but it appears that we're doing some things that are first in the world. We're clearly pioneering display industry's adoption of the cloud in our design activities.

This is very, very powerful for 3 reasons. One, we go to the cloud. It can substantially increase our productivity. And two, it also allows for much lower operating costs. And three, as these cloud platforms, as we're using them, the data centers are using renewable energy. So we have 3 positives that come from this.

But this is -- we're a manufacturer, but there's a significant software component to what we do in terms of us automating our processes, particularly CAD and CAE processes. And it's something that we'll probably provide more disclosure to going forward because it is a core element of our competitive advantage. And we think we're actually building out our advantage relative to many of our competitors in this space.

Those were my prepared remarks. What is going on right now at JDI is extraordinary technological transformation in which we think we're going to deliver. This primarily shows up in 2024 in terms of kind of the big revenue run that comes from it, but literally technologies that have never been in the world before with substantial advantages in cost performance. And these are not kind of improvements of [indiscernible]. These are massive improvements.

So thank you very much for paying attention to us. It's a way of saying the technology deliverables that I have announced for today are the most important way to understand whether or not we're on track. And as I say, we're in customer ship -- the sample point for eLEAP, there are a lot of things going on.

So thank you very much, and we'll continue working hard for all of you. Take care. Be safe.